05/08/2014

As a human resources professional with over 15 years of proven experience, Douglas Battista is wholly qualified to answer questions related to employee benefits. Here, Battista discusses the differences in defined benefit and defined contribution retirement plans.

Defined benefit plan

In the defined benefit option, an employer dedicates a monthly amount calculated by using a formula that includes an employee’s current age, earnings history and time of service. The plan is called “defined benefit” because it clearly marks the employee’s expected payout upon retirement. Defined benefit plans are oftentimes referred to as pensions. Douglas Battista notes that oftentimes, an employee is not responsible for contributing money to this retirement plan.

Defined contribution plan

On the other hand, a defined contribution plan does require some amount of money from the employee in order to fund it. Both the employee and the employer provide contributions on a consistent basis, according to Douglas Battista. The most common defined contribution plans are 401(k) and 403(b) plans. With these plans, contributions are typically placed into an investment account, and the employee chooses from a number of investment options.

Available choices for employees

Some employers have both options available to employees, says Douglas Battista. However, a number of private-sector employers have eliminated pensions and replaced them with 401(k) plans. As a result, most of the risk and expense is shifted to the employee. Pensions remain a popular option within the public sector – for example, government employers and the military.

Future of retirement plans

Given the uncertain nature of the U.S. economy, a majority of public firms are expected to cancel their pension plans in the near future, reports Douglas Battista. Employers are concerned about the liability associated with pensions and continue to seek out more prudent options.